A practical problem often encountered in the VAT context is when services or goods are supplied to and from VAT vendors via agents. (In this context, the term “agent” is used in the legal sense where a “principal/agent” relationship exists, and not where the term is often loosely used in the non-legal sense, where reference is made for example to estate agents or stock brokers.) Rather, the VAT problem referenced here is where an agent would act and contract on its VAT registered clients’ (or “principals’”). An example would be where a firm of engineers obtain a demolition certificate on behalf of their clients or where a firm of buyers source goods on behalf of their retailer client. In these examples, the services rendered or goods purchased are not for the “agent’s” own benefit: contractually the services are rendered to and the goods are purchased directly by the agents’ clients. In these instances, an agent merely has authority to act on the principal’s behalf and to facilitate the transaction involved; it is itself however not legally a party to the transaction.
From a VAT perspective this can become troublesome, as typically the agent will be required to issue or be issued with a VAT invoice actually intended for its principal. The question is therefore whether the agent can ever become a link in the VAT chain: can it claim input tax on the invoices received by it from the supplier of the goods or services (albeit to the principal), and should it raise an invoice of its own to its clients and charge output tax thereon?
Section 54 of the VAT Act, 89 of 1991, has been specifically included to cater for such scenarios. Although section 54(2) is clear that any VAT supply made by a VAT vendor to a person in its capacity as agent shall be deemed to have been made directly to the principal. The same applies where an agent makes a supply on behalf of its VAT vendor principal (section 54(1)): the supply is for VAT purposes deemed to be made by the principal itself. The rule to be observed therefore is that an agent never joins the VAT chain of transactions: supplies are deemed to be made directly by or to the principal on whose behalf the agent is acting. In effect therefore, this position in section 54 is merely the statutory confirmation of the common law position as would have existed in terms of the law of agency.
Section 54 however also has a pragmatic element to it as relates documentary evidence: it provides for the concession that insofar as invoices are concerned, where an invoice is issued by the supplier to the agent (and not the VAT vendor principal), the principal may use said invoice to claim its input tax deduction, even if that invoice has not been issued to it. Similarly, where an agent makes a supply on behalf of a vendor-principal, the agent may issue the client with a tax invoice as if it had itself had made that supply and levied output tax (and in which case the principal may not also issue an invoice). This concession is obviously made with practicalities in mind: where a third party deals with an agent the third party will often be unaware of the principal on whose behalf the agent is acting and documents will typically be issued to that agent, and the client will be expecting to receive documents from the agent; not some unknown party with whom it had not been dealing with in setting up the particular transaction in question.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)